00/03 Debt Relief, Globalization, and IMF Reform: Some Questions and Answers By IMF Staff April 12, 2000

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I	Debt Relief and the HIPC Initiative
II	Globalization
III	IMF Policies and Poverty Reduction
IV	The Role and Reform of the IMF

I. Debt Relief and the HIPC Initiative

The IMF strongly supports generous debt relief for the poorest countries when it is part of a sustainable strategy to improve living conditions. Debt reduction alone cannot reduce poverty: poverty existed before debt, and debt relief wasted on unproductive spending can bring no benefit to the poor. The IMF seeks to help countries to put in place the policies that can make debt reduction beneficial to the poor.

Many low-income countries face unmanageable debt burdens and grinding poverty. Debt relief or cancellation should be an integral part of efforts to alleviate their poverty. It can be effective only when accompanied by appropriate policies in the countries themselves, and in donor countries, including trade concessions and new aid flows.

Even before the 1996 initiative for the heavily indebted low-income countries (HIPCs), low-income countries were already eligible for concessional debt relief from creditor countries through the existing debt relief mechanism, the Paris Club. The original HIPC initiative offered more concessional relief and extended coverage to debt owed to multilateral organizations (the World Bank, IMF, and regional development banks). The 1999 enhancement of the HIPC initiative makes it even more concessional—faster, broader, and deeper.

The IMF has a leading role in the HIPC initiative and welcomes the offer by several creditors to write off all the debt owed by HIPCs. But the complete cancellation of all debt (including that of the IMF and the other multilaterals) raises complex issues:

• Debt reduction or cancellation, no matter how generous, provides only temporary relief, unless steps are taken to improve the underlying conditions that caused the problem in the first place. A comprehensive approach is needed to stimulate durable, rapid growth and poverty reduction. This approach should include the countries’ own efforts through policy reform, and actions by the rest of the world. This would include trade concessions by advanced economies and new external assistance as well as debt relief.



• It would be unfair for the IMF and other multilaterals to write off the debt of one set of poor countries but not do anything for other countries that are just as poor, but have pursued sound policies, and so have manageable debt. It is also not at all clear that a complete write-off of all debts would lead to larger net flows of aid or other finance. What is needed is more and better-targeted aid flows to support the poor countries’ own growth-oriented poverty reduction strategies.



• There is a financial cost to debt relief that must not be allowed to jeopardize badly needed new financial assistance to the HIPC countries or other poor countries. The IMF must observe the highest level of financial integrity. The cost of the IMF’s participation in the HIPC initiative will be met by profits from off-market gold transactions and contributions from over 93 countries. The IMF does not have the authority to simply write off additional debt from its own resources without jeopardizing its ability to lend to other countries in need. Large new commitments of resources from the advanced economies would be needed, but the decline in official development assistance from these countries in recent years indicates the budget constraints that they face.

II. Globalization

Globalization leads to economic growth and higher incomes. No country has benefited for any length of time from closed-door policies, and the countries that have achieved most prosperity have embraced globalization, together with the policies that make it work. Outward-oriented policies brought dynamism and prosperity to much of East and Southeast Asia. This experience shows that globalization offers extensive opportunities for truly worldwide development. But it is clearly not progressing evenly and countries that are integrating more slowly are seeing slower growth and more poverty.

One very important reason that global inequality has increased—with some countries doing extremely well and others poorly—is that many countries have resisted globalization or the policies needed to tap its benefits. In the 1970s and 1980s when many countries in Latin America and Africa pursued inward-oriented policies, their economies stagnated or declined, poverty increased and sometimes hyperinflation set in. As these regions have changed their policies, their incomes have begun to rise. After decades of decline, real per capita incomes in Africa are beginning to creep up again. The trends toward openness and sound economic policies, together with strongly pro-poor policies, are essential components of effective strategies for reducing poverty in the low-income countries (see questions 3 and 5 below).

Industrial countries also reap benefits from globalization, because international competition brings new and higher-quality products and thus higher living standards. A high level of job creation and record low unemployment in the United States, and an improving situation in Europe, point to dynamic economic changes that are being helped, not hindered, by globalization. True, jobs are sometimes lost as older industries decline, but those losses clearly are outweighed by the jobs created in newer industries. Education, job training and social safety nets help workers adversely affected by structural economic changes.

The IMF seeks to help countries put in place the policies that make globalization work—macroeconomic policies, structural policies that help markets function, social safety nets. The International Labour Organization is working to promote core labor standards, aimed at reducing worker exploitation, especially the practices of child or forced labor. The IMF fully supports these efforts. Foreign corporations are an important source of direct investment in developing countries. These investments bring greater productivity, job creation, and higher incomes. Forcing wages or labor standards up to the levels of advanced economies too quickly would likely price them out of work. But over time they can be expected to catch up; and that is happening in countries that have been opening up their economies. The challenge is to bring these benefits to lower-income countries, especially to Africa.

There is no single formula for the high rates of growth needed for rapid catch-up, and specific policies will differ from one country to another. The broad elements of a strategy include efforts by the low-income countries, the advanced economies and the international organizations like the IMF.

The low-income countries can:

• promote growth through domestic policies that encourage macroeconomic stability and market forces by freeing trading restrictions, reducing subsidies, improving the quality of government services, and strengthening legal and financial institutions;



• reduce poverty through "country-owned" strategies that promote pro-poor policies that are properly budgeted—including health, education, and strong social safety nets. A participatory approach, including consultation with civil society, will add greatly to their chances of success.

The advanced economies can:

• reform their own trade policies, opening new markets to exports from poor countries;



• reduce domestic subsidies in sectors such as agriculture and textiles where poor countries are most likely to benefit;



• increase not only the debt relief they provide in support of good policies, but also their official development assistance (ODA or "aid"), reversing the downward trend of the past two decades. They could also make that aid more effective by reducing the extent to which it is tied to their own exports, and by better coordinating their assistance and debt relief with poor countries’ poverty reduction strategies.

The IMF, the World Bank, and the other multilaterals, are working together to support the efforts of the low-income countries by further increasing their collaboration. The IMF offers its financial and technical assistance and policy advice through the Poverty Reduction and Growth Facility (PRGF), as a vital contribution to poverty reduction strategies (see below).

III. IMF Policies and Poverty Reduction

A recent review by outside experts found that structural adjustment programs supported by the ESAF (now replaced by the PRGF) have led to a marked turnaround in growth in recipient countries.

Statistics show that in the late 1990s, per capita income growth in these countries, at 2½ percent annually, was twice as high as in other developing countries. Programs supported by the IMF’s concessional lending raise output and reduce inflation. Developing countries, through their experience, are showing that prudent macroeconomic policies, more open markets and a favorable environment for private sector activity are the basis of this improvement.

In its advice, the IMF also takes explicit account of the impact of reforms on the most vulnerable groups in society. For instance, even if budget cuts are needed, social spending is typically protected or even increased. In the relatively few countries for which data are available, poverty rates have declined by an average of 20 percent under IMF-supported programs.

But more rapid economic growth is needed to advance the battle against poverty. The changes in policies and approach under the PRGF focus the IMF’s work in the low-income countries on the central goal of poverty reduction. The new approach is intended to breathe life into the commitment that the international community made in many United Nations conferences to reduce abject poverty by one-half by 2015, together with many other goals for education, health, nutrition, and the basic quality of life.

The IMF’s approach to assisting the low-income countries has evolved over time. Until the mid 1980s, the only instrument available was lending at market interest rates from the Fund’s regular resources. But the low-income countries had more deep-seated problems than could be addressed through unsubsidized facilities that were designed to handle short-term stabilization. So structural adjustment lending (through the ESAF) became the key instrument. And since then, significant progress has been made. Over the years, and in collaboration with the World Bank, social objectives became increasingly prominent in these programs, especially through attention to social safety nets and health and education spending.

But progress in alleviating poverty was still far too slow. The PRGF incorporates four key ingredients that were not adequately addressed in the old ESAF framework, and that are central to the strategies supported by the World Bank and the IMF.

• poverty alleviation is the explicit, central objective of economic policy;



• country "ownership" of the policies is given a much stronger emphasis;



• a participatory approach to policy formulation is adopted to ensure that civil society is fully represented in the preparation of poverty reduction strategies. In this way, the poor will have better access to the benefits of growth;



• strengthened donor coordination is crucial, meaning that the World Bank and other agencies can provide their expertise on poverty reduction while the IMF provides advice on macroeconomic policy and reform.

IV. The Role and Reform of the IMF

6. Is the IMF not suffering from "mission creep," having become involved in too many non-core issues? Why doesn’t the IMF just stick to its mandate?

The IMF’s membership has grown fourfold since it was established, and it has become correspondingly more diverse. At the same time, the global economy has become increasingly integrated, and economic policy challenges have become more complex, often requiring more rapid responses. The gaps between rich and poor countries, and rich and poor people within countries, have grown. In this rapidly changing world, economies are more interdependent, problems are interlinked, and solutions must be found in a collaborative framework. It is only natural that the IMF should evolve to serve the needs of its changing membership in an evolving world economy. This is in keeping with the purposes of the IMF of promoting international stability and growth, as contained in its Articles of Agreement.

The IMF finds itself in such a central role in many different areas for two very broad reasons. First, macroeconomic and financial policies interact with virtually every other strand of countries’ policymaking and national aspirations. For example, poverty reduction requires economic growth, which requires macroeconomic and financial stability, including low inflation. The evidence is clear that low inflation helps the poor. Therefore, the IMF can make a vital contribution to poverty reduction. That role makes sense in the poorest countries, even if the detailed work on social policies is done by other agencies. Second, the IMF is the only international agency whose mandated activities routinely bring it into an active dialogue on economic policies with virtually every country. That makes it a natural vehicle for discussing some of the key issues related to the stability of the international monetary and financial system, such as standards and codes, and consequences of rapid capital movements.

These issues have had a growing role in IMF lending and policy advice. Fund-supported programs seek to promote universal access to basic social services. Indeed this is a core feature of the IMF’s new PRGF. This will build on the progress since the IMF began its structural lending in the mid-1980s. During this period, in the 66 low-income countries with IMF-supported programs, government spending on education and health care on average increased as a percentage of both GDP and in real per capita terms.

IMF-supported programs also frequently take environmental issues into account. This has been the case where environmental degradation has a direct macroeconomic effect; for instance where the depletion of natural resources, such as forestry or fisheries, damages a country’s prospects for sustainable growth.

And many key elements of the PRGF are designed to take account of the institutional and cultural situation of countries using IMF resources. These include the increased emphasis on poverty reduction, transparency, and governance, through a process that stresses country ownership and a participatory approach to policy formulation.

The IMF’s mandate and expertise are in the areas of the international monetary system and macroeconomic policy. The IMF’s limited expertise in other areas means that it cannot take the lead in extending advice to countries on the details of social spending, of environmental policy, or many aspects of institutional reform. It looks to other organizations, especially the World Bank and the regional development banks, the World Trade Organization, and the UN system to take the lead in working with the countries on the detailed policies needed. But a comprehensive approach gives all involved the confidence that the many different aspects of policy are being implemented within a comprehensive, consistent set of national objectives "owned" by the national government.

8. What is the IMF doing to reform itself?

The IMF’s long history of reform is continuing as the Fund adapts itself to the rapid pace of change in the global economy. IMF reform is an integral part of the process of strengthening the international financial system. The following are key elements:

• Surveillance is changing to take into account new standards and codes for the conduct of policy in such areas as financial sector soundness, transparency in fiscal monetary and financial policies, and data provision.



• Transparency is being promoted through the extensive release of information and data about country policies and programs supported by the IMF. The Fund is making more information available to the public about its own operations and financial position.



• The IMF now has a stronger capacity to respond to crises, thanks to the creation of the Supplemental Reserve Facility, and the Contingency Credit Lines, a facility designed to head off contagion.



• The IMF’s concessional assistance to the low-income countries received a new orientation in September 1999, when the PRGF replaced the ESAF.



• The IMF has played a central role in the enhancement of the initiative for heavily indebted poor countries to provide deeper, faster, and broader debt relief for countries pursuing sound policies and committed to reform.



• Just as new facilities are added to respond to new needs, old facilities are retired. The Executive Board recently retired four facilities that had become redundant.



• An active review is under way to identify ways of further strengthening safeguards on the use of IMF resources.